Auto Laundry News - August 2012

Public Need — Adhere to this Fundamental Principle

By Robert Roman

Sufficient evidence of public need for commercial land use is often required before approval for that land use can be
granted. So, it is public need that gives rise to municipal codes and ordinances that are used to establish and enforce general and specific purposes of various land uses.

Municipal regulations are intended to ensure a new business is appropriately located, would strengthen the economy and provide jobs, minimizes impacts to adjacent uses, conforms to design guidelines, provides adequate parking and loading facilities, and would not result in inharmonious uses.

Similarly, it is public need that gives rise for developers to examine consumer demand and the supply of stores in an area to determine whether there is unmet demand and whether a proposed business would be reasonably convenient and useful to the public. Solutions for these two aspects of public need are usually necessary to obtain approvals and funding.

Unmet demand can be solved by evaluating factors that are determinative of the project’s ability to accommodate public need. Reaching a conclusion can be accomplished by estimating total demand in a defined area, examining consumer characteristics, and estimating project usage.

For example, gas and convenience store retailers often use a store-saturation index to help solve an unmet-demand question. Let’s assume we estimate total potential sales of 11.2 million gallons
of gasoline annually in a given area.
If it takes 750,000 gallons for a gas station to be profitable, then the trade area would support roughly 15 stores (11.2 million/750,000).

If there were 20 stores selling gas, the store saturation index would be 133 = (20/15) x 100. Consequently, the finding would be there is no unmet demand for gas in the area.

Although developers use this process to evaluate business concepts before determining the best one to proceed with, the process can also be used after the fact to develop innovative approaches that best fit the commercial needs of the public. A real-world example illustrates this.

Car Wash USA Express is a growing chain of express washes based out of Memphis, TN. USA Express was started by Ray Holley, CEO of Carwash Superstore. The first store was opened in 2005.

According to the Memphis Business Journal, USA Express opened its fourth store in 2007 washing about 200 cars a day. The journal mentioned the firm averaged $600,000 in annual revenue per site and the newest location would likely cost $2.5 million to build including land.

In Auto Laundry News, May 2009, Kerry Sewell, USA Express executive VP, noted the difficulties in finding land for a new store and the highly competitive nature of the Memphis car wash market.

Memphis is located in the southwest corner of the state near confluence of the Wolf and Mississippi rivers. Memphis is a national transportation hub with river crossings for Interstate 40 and 55, barge traffic, an international airport, and railroads.

The city and metro have a population of 600,000 and 1.3 million, respectively. Per capita income is $20,000, up from $17,800 in 2000. Measuring from the city center to a distance of 14 miles, my models suggest the total car wash market is about $35.5 million.

A survey I did of Memphis some years ago pegged the wash fleet at about 40 sites plus 280 gas stations and convenience stores with 80 to 90 in-bays. In other words, the area had a fairly high store-saturation index. Since that time, USA Express built stores as did Boomerang and Goo-Goo’s.

After building nine washes in Memphis, the journal noted USA Express’ latest three washes built in Mississippi reflected a new strategy of creating smaller-scale units by rehabilitating existing self-service sites as express washes. The journal noted the new tunnels were 90’ instead of 125’ and the company invested $1.5 to $1.7 million per site which averaged about $600,000 in revenue annually.

Arguably, it was lack of public need in Memphis and pressure of building and funding $2.5 million washes that caused USA Express to change strategy. According to a February 2011 post on Chubby-Brain, a search engine for entrepreneurs, and Funding-Flash, an e-mail service, USA Express secured venture capital funding for future development.

As shown by USA Express, the risk of market, competition, and product is best managed by adhering to the fundamental principle that there is actually a public need for a new wash.